Red Flags of Fraud

In today’s day and age, fraud is occurring all around us. The impact fraud has on your business can be devastating. In fact, The Association of Certified Fraud Examiners’ Global Fraud Study found the typical organization loses a median of 5% of revenue each year due to fraud. Small businesses have it even worse. The same study found companies with fewer than 100 employees lose a median of $155,000 each year due to fraud, compared to a median loss of $120,000 for businesses with 100 or more workers.

These statistics are scary, and fraud can undoubtedly wreak havoc on your business if you don’t catch it.

So how do you prevent fraud from happening in your small business? There are five common areas where red flags of fraud may pop up.

  • Common Sense Flags – These flags are usually obvious, but sometimes overlooked. Some of the most common include:
    • Complaints from other employees regarding an employee
    • Unexplained amounts of overtime
    • Employees who have a history of lying
  • Behavioral Flags – These flags may be easy to recognize by the way an employee is behaving. Examples include:
    • Spending too much time at work – the employee rarely takes vacations and/or never misses work
    • The employee won’t let other employees help them with their workload, even if they’re overwhelmed
    • An employee who manages financial records is extremely protective over the records
  • Accounting Flags – The accounting department has many areas where fraud can be committed. After all, this is where the money is. Be on the lookout for some of these red flags:
    • The business is unexplainably unprofitable
    • You’re noticing cash flow issues
    • There are issues with missing and adjusted inventory balances
    • Account balances aren’t reconciling
    • Unexplained adjustment entries on the books
    • Financial statement trends and ratios don’t make much sense
  • Documentation Flags – Keeping up with documents that go in and out of the business can help you catch fraud in your business. Common issues may include:
    • Excessive credit memos
    • Original documents have been messed with (invoices, vendor statements, bank statements), whether it’s electronically or whited out on a hard copy
    • Deposit slips and receipts that are MIA
    • An excessive amount of accounts receivable being written off
  • Internal Control FlagsYour internal controls are where your business operates on the daily. This leaves a large area where fraud can be occurring. Watch out for these issues:
    • Expense reimbursements do not match up with receipts
    • Background checks on key employees are not being performed
    • A single employee has control of the company check book
    • Internal controls are non-existent or inconsistently enforced
    • Company credit cards are easily accessible to everyone (and support for those expenses is not submitted)

 

Fraud can have a devastating impact on your business, and can be extremely hard to recover from. By keeping an eye out for these red flags, as well as other issues that don’t seem quite right, you can help prevent your business from falling victim to fraud.

A version of this blog was first produced by our Forensics team on eidebailly.com.

 

Final_infogaphic_web_Fraud Red Flags

One comment on “Red Flags of Fraud

  1. […] aren’t being properly managed, your business can see some serious negative side effects, such as fraud. Following this list of tasks can help you make sure you’re keeping everything in check. Looking […]

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